Report25 June 2018Updated 10 months ago

FX Talking: Stiffening headwinds

Global growth prospects are being curtailed by President Trump’s protectionism and a strong dollar exporting tighter Federal Reserve policy around the world. These trends look set to continue over coming months – or at least as long as Trump policies play well in approval ratings

Executive summary

EUR/USD looks set to stay vulnerable this summer, hit by the triple whammy of (i) growing protectionism hitting the more open European economies, (ii) further Fed tightening and (iii) political challenges in Germany and Italy. EUR/USD is cheap near 1.15, and our year-end forecast of 1.23 assumes that trade tensions de-escalate and the ECB ends QE in December. However, EUR/USD risks look skewed to the downside.

Elsewhere in Europe, sterling and Norwegian krone could receive some support from rate hikes over coming months. The Swedish krona will be the clear under-performer, hurt by protectionism and the proximity of September elections, where a referendum on EU membership is a tail risk.

Within CE4, the Hungarian forint has been and will continue to remain under pressure as investors stress-test the dovishness of the local central bank. The Polish zloty should continue to find demand helped by good prospects for the local bond market and Poland’s diversified export base.

Asian FX has been hit hard by protectionism, and there are substantial upward revisions to our USD/Asia forecasts – especially USD/KRW. Election risks remain to the fore in Latin America, but we suspect investors will be keen to buy into Mexican peso dips. Brazil's real looks more fragile too.